Nadella to Cook on Office revenue sharing: Drop dead

With the launch of Office for iPad yesterday, Microsoft again effectively cut Apple out of most of the revenue stream by making the apps free to download.

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With the launch of Office for iPad yesterday, Microsoft again effectively cut Apple out of most of the revenue stream by making the apps free to download.

Office for iPad can be downloaded free of charge and used to view documents and spreadsheets, and present PowerPoint slideshows. To activate the three apps -- Word, Excel and PowerPoint -- for document creation and editing, users must sign in with valid Office 365 subscriber credentials.

But because the apps are free, Microsoft is not obligated to fork over 30% of the sales revenue to Apple, a condition of the App Store for paid apps and all in-app purchases.

Microsoft has used the same sales strategy before: Last summer, when it launched Office Mobile for the iPhone and Android, it also gave away the apps. They were worthless, however, unless tied to an Office 365 subscription. (On Thursday, Microsoft changed the rules for Office Mobile, allowing full functionality for free to home users, while still requiring an Office 365 plan for business customers.)

The only revenue for which Apple is due its 30% commission will be what's produced by in-app purchases of an Office 365 plan, the same scenario as has existed since mid-2013 when Microsoft first dropped Office Mobile for the iPhone into the App Store.

Wes Miller, an analyst at Directions on Microsoft, a Kirkland, Wash. research firm that specializes in following Microsoft's every move, said that Apple might take its cut here and there. "For some consumers, [the new apps] may get them to subscribe to Office 365, Personal in particular," Miller said.

Office 365 Personal, which has yet to go on sale, will give customers the right to install the desktop Office on one PC or Mac and also include rights to use Office on one tablet. When it was unveiled, Miller called it an "obvious preface for Office on the iPad."

Although the monetization model wasn't new for Microsoft, a company official yesterday labeled it "freemium" for the first time, a nod to the popular app strategy that relies on free downloads to seed copies, then in-app purchases for revenue. The game Candy Crush, for instance, uses a freemium business strategy.

The only plan that can be currently bought from within one of the Office for iPad apps is Office 365 Home, the $100 per year consumer deal that allows customers to install the suite on up to five PCs and Macs, as well as on up to five different tablets within the same household. That, too, was the case with Office Mobile for the iPhone.

For each Office 365 Home subscription purchased within an Office app, Apple keeps $30 and Microsoft receives the remainder, or $70. If Microsoft, as Miller seemed to expect, replaces Home with Personal when the latter launches, then Apple would keep $21, Microsoft the remainder, or $49, of every Office 365 Personal in-app purchase.

But Microsoft is not obligated to share any Office 365 revenue from plans it sells directly to consumers through retail or its online store, or those it or its channel partners sell to corporations. Business-grade Office 365 plans start at $150 per user per year and climb to $264 per user per year. Those will be outside Apple's reach.

In-app purchases have always been liable for the 30% commission to Apple, which some have derided as an Apple "tax," but purchases outside apps have not. In early 2011, then-CEO Steve Jobs put it plainly: "Our philosophy is simple -- when Apple brings a new subscriber to the app, Apple earns a 30% share," Jobs wrote in a February 2011 statement. "When the publisher brings an existing or new subscriber to the app, the publisher keeps 100% and Apple earns nothing."

Microsoft has never disclosed revenue from its Office 365 software-as-a-service or revealed how many of those subscriptions have come from in-app purchases within Office Mobile on the iPhone and Android. Its only regularly-revealed data point has been the number of Office 365 Home Premium subscribers, which was described in January as 3.5 million.

Apple will not get rich off Microsoft. Even if all 3.5 million Home Premium subscribers had purchased their plans through an app -- certainly not the case -- Apple would have accrued just $105 million annually, a pittance for a company that recorded $57.6 billion in the December 2013 quarter alone.

Users wary of Office 365's rent-not-one model can try the new Office for iPad apps' full functionality by tying them to an Office 365 30-day trial, which is available from Microsoft's website. For the trial, customers must provide a payment method, but can cancel the deal within the first month without being charged.